Sunday, September 2, 2007

A 287-city report finds the slowest growth in two decades, with metro areas in California and Florida showing year-over-year declines of as much as 8%.

By Marilyn Lewis

It's housing whiplash: The boom is biting back in the places where it ran highest and fastest just a couple of years ago, a government report for the second quarter shows.

Nationally, the Office of Federal Housing Enterprise Oversight (OFHEO) said prices were essentially flat, growing just 0.1% from April through June, and nearly half of cities profiled showed declines for the quarter. Not since 1994 have home prices grown so little over a quarter.

Compared with a year ago, prices were up 3.2%. But that number reveals nothing about the recent mortgage market turmoil, whose influence will show up in third-quarter numbers, revealed in late November. Also, the OFHEO index, while prized for its scope -- it tracks prices in 287 metro areas -- can appear rosier than some other instruments because it does not contain refinances or mortgages larger than $417,000.

Of those 287 metro areas, 131 showed price declines for the quarter. Over the past four quarters, 61 areas reflect declines. But over five years, no metro area shows up in the red.

"These newest data show price declines in many areas that were once at the center of the housing boom," said OFHEO chief economist Patrick Lawler. The worst declines were in California, Florida and Nevada, all centers of huge housing booms until recently, and in Michigan, which is reeling from epic job losses.Best and worstThe biggest decline was in the Merced, Calif., area. Homes there lost 8.65% of their value over this time last year and 3.76% from the past quarter. Merced's experience underscores Lawler's point: Even with the whiplash correction, Merced prices show growth of nearly 90% in the last five years.

Runners-up for the biggest decline included the California metro areas in and around Santa Barbara, Stockton, Salinas, Modesto, Yuba City, Sacramento, Santa Rosa, Santa Cruz, San Luis Obispo, Oxnard and Vallejo, and Reno, Nev., in the California orbit. Prices dived in Florida communities in and around Punta Gorda, Sarasota, Cape Coral, Palm Bay, Port St. Lucie and West Palm Beach.

Smaller cities in the West and Northwest were the stage for much of the best price growth last quarter. Topped by Wenatchee, Wash.'s nearly 24% yearly price increase -- 5% for the quarter and nearly 80% growth in five years, the fastest growth areas were dominated by Washington, Utah, Colorado, Oregon and Texas. The list also includes cities in Alabama, the Carolinas, Virginia, Mississippi and Pennsylvania.

The OFHEO report tracks data from the previous quarter, but there has been nothing in the interim to suggest that prices have stopped slowing, "I don't know if we are going to go into a steep decline or just keep coasting to the bottom," says Amy Crews Cutts, the deputy chief economist at Freddie Mac. "Stabilization is key."

Cutts has been surprised by the downturn's persistence. "I had originally been thinking (it would end in) the middle of this year." But the August financial crisis probably has pushed any recovery "into 2008," and that's "predicated on the financial markets getting their act together pretty quickly."Bad news mountsOther news underscores the seriousness of the downturn:

* The National Association of Realtors reported last week that median price of existing homes fell in July to $228,900 -- a 0.6% drop from the previous month and the fifth straight monthly decline. The volume of house sales hasn't been this low in nearly five years.

* The widely respected Standard & Poor's/Case-Shiller Home Price Index shows that prices fell 3.2% on average in the second quarter. It was the biggest drop recorded in the report's 20-year history. Unlike OFHEO, Case-Shiller includes "jumbo" loans over $417,000 not held by Freddie Mac and Fannie Mae. The report tracks prices in 20 cities and found prices declining in 17 of them.

* Inventory -- the supply of single-family homes on the market -- is at 9.2 months nationally, which is to say it would normally take that long for the backup to sell. Nearly a year's supply of condos is currently on the market. Inventories in a balanced market run at about six months, says Walt Molony of the National Association of Realtors. "During much of the boom we averaged 4.5 months," he says. The low point, in January 2005, was 3.6 months.

* Mounting defaults and foreclosures have inspired North Carolina, Ohio, Minnesota and Maine limit subprime lending. Others are trying to help borrowers refinance. The New York Times reports that in about 30 states lawmakers have introduced nearly 100 bills to curb deceptive lending and foreclosures.

Bubble theorists are growing louder in the insistence that prices must revert all the way to pre-boom levels before a recovery begins. Bruce Marks, the CEO of the Neighborhood Assistance Corporation of America, believes prices could drop 10%, 15% or even, in some places, 25%.

"You are not seeing bubbles bursting in certain parts of the country -- you are seeing a nationwide decline," says Marks, whose nonprofit advocacy organization lends to lower-income buyers.

Cutts discounts that view. It would take a catastrophe like the Great Depression to see that kind of thing, she says. "I know it feels like the sky is falling. It's bad out there." But she says sales of new and existing homes are down 20% in the past two years, more resembling pre-boom 2001 than the 1930s.SoberedAlthough few analysts share the extent of Marks' pessimism, but plenty are sobered by the past quarter's performance. The trend "is horrible," Ian Shepherdson, the chief U.S. economist for High Frequency Economics told his newsletter readers, adding, "the market is "much worse than headline sales numbers suggest -- and still deteriorating."

Robert J. Shiller, the chief economist at MacroMarkets and originator of the Case-Shiller system of market analysis, said in a news release that "the pullback in the U.S. residential real estate market is showing no signs of slowing down."

The research firm Global Insight told The New York Times to expect a decline of 4%, roughly 10% after inflation, from this year's peak to a low in 2009. The company forecasts prices in California to drop 16% to 20%, counting inflation.

Cutts is not sanguine about the near term, either. She sees potential for more subprime mortgages failing. Currently, most delinquencies are in Northeastern industrial cities plagued with layoffs and poor economies.

Most risky loans, however, are concentrated on the coasts. There, housing became so unaffordable that large numbers of borrowers purchased time-bomb subprime loans that they could only temporarily afford to repay -- for houses they could not realistically support.

Already, 2.9% of subprime loans issued just last year are in default. That's alarmingly high, Cutts says, and an unprecedented number of borrowers are not making even the first few payments.A variety of regional problemsFor signs of recovery, look to New England, where economic activity appears to be increasing. Cutts expects that, before too long, prices will hit bottom and at least stabilize. Boston was first, in 2006, to show falling prices from year to year, and, with the region's strong, diversified economy, Cutts and other economists are watching it for signs that it also could lead the way back.

Regions hardest hit by falling prices are Florida, the northern industrial cities of the Midwest in Michigan and parts of Ohio, Illinois and Indiana, and the once-white-hot growth markets of the arid West, including parts of Nevada, Arizona and California.

Housing in the former industrial Rust Belt will take extra long to recover. "Job losses were so deep that it's going to take a modern miracle to show a turnaround there," Cutts says.

The housing scene in the arid West is troubling, particularly in California, she says. That's where the riskiest mortgages were sold to feed demand as prices soared to record levels. California foreclosures still aren't showing up in massive numbers, but they're increasing surprisingly fast, she says, particularly among the riskiest of the mortgages, issued just last year.

In San Diego and fast-growing inland cities, the economic pressure from collapsing housing prices may become exacerbated by job losses in the subprime-mortgage industry, making it harder for housing to pull out of the tailspin.

"As the lenders go down, they fire a lot of people," says Cutts. "I saw that 40,000 mortgage-related jobs (nationally) have been lost this year. There are a lot of subprime lenders headquartered in California."

Mike Inselmann is concerned about California, too -- and Florida and maybe even Nevada. The co-founder of the housing market research firm American Metro/Study says that despite strong economies, these markets have "more serious issues."

He blames local regulatory obstacles to growth for creating a housing scarcity, especially in California, where the strong economy was driving housing demand.

"Everything got disconnected between supply and demand and pricing," he says, and as a result, he says, prices were pushed artificially high. That invited speculation, flipping, risky lending and, eventually, overbuilding.

The collapse was inevitable. Then, the coup de grace: "The breath was knocked out of the whole marketplace when the subprime deal blew up in April and May, and that whole thing has reached hysterical levels of fear."Discretionary buyers step backFlorida's cosmopolitan appeal has amplified its troubles from overbuilding and run-up prices: The real estate market is a haven for Latin Americans with discretionary cash as well as a magnet for northern retirees and workers anticipating retirement. As prices rose, these discretionary buyers retreated, leaving legions of empty homes to too few local buyers. "When the chill enters the marketplace, those people can sit on their hands (and wait)," Inselmann explains.

Las Vegas, a similar market on the other side of the country, still is growing, just more slowly. Now 5,000 newcomers arrive monthly, many for casino jobs; before, it was 7,000. The city is awash in new condos that investors had hoped to flip or chose not to keep. They compete with even-newer developments coming on line, says Mark Weinberg, who's been an agent there for Prudential Americana Group Realtors for 13 years.

"I gotta be honest," he says. "I've seen the inventory extend out; I've seen people, unfortunately, losing their homes." A home that used to sell in three or four months now takes four to seven months or more. Weinberg's wife, a loan officer, lost a job when her employer went bankrupt.

Builders concentrated on million-dollar condos aimed at out-of-towners, leaving a paucity of homes for working people, say analysts. As in Florida, "the rich people are suddenly saying, 'You know, I don't need a condo in Vegas right now,' " says Cutts, of Freddie Mac.

But Las Vegas always reinvents itself, Weinberg says. With "job growth consistently every month, population growth every month, very low unemployment and money still pouring into development on The Strip," he is anticipating a recovery by late 2008.

Cutts, too, has the end in sight. "If homes are being bought for the long run, housing is still a very good deal," says Cutts. Eventually, values will return, she adds. After the collapse of the Southern California defense industry in the early 1990s, prices took 10 years to reach previous levels.